Good morning, and welcome to the Vornado Realty Trust Fourth Quarter 2022 Earnings Call. My name is Dave, and I will be your operator for today's call. This call is being recorded for replay purposes. I will now turn the call over to Mr. Steve Borenstein, Senior Vice President of Corporation Counsel. Please go ahead.

Welcome to Vornado Realty Trust Fourth Quarter Earnings Call. Yesterday afternoon, we issued our fourth quarter earnings release and filed our annual report on Form 10-K with the Securities and Exchange Commission. These documents as well as our supplemental financial information packages are available on our website, www.vno.com, under the Investor Relations section. In these documents and during today's call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10-K and financial supplement. Please be aware that statements made during this call may be deemed forward-looking statements, and actual results may differ materially from these statements due to a variety of risks, uncertainties and other factors. Please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2022 for more information regarding these risks and uncertainties. The call may include time-sensitive information that may be accurate only as of today's date. The company does not undertake a duty to update any forward-looking statements. On the call today from management for our opening comments are Steven Roth, Chairman and Chief Executive Officer; and Michael Franco, President and Chief Financial Officer. Our senior team is also present and available for questions. I will now turn the call over to Steven Roth.

Thank you, Steven, and good morning, everyone. It's Valentine's Day. As Michael will discuss shortly, 2022 was a strong year with comparable FFO up 10%. However, fourth quarter FFO was down 11% due to higher interest rates. Excluding the impact of rising rates, our core business is performing well. Unsurprisingly, we anticipate that 2023 will be a down year, adversely affected by a full year of elevated rates. I want to share a few additional thoughts. Despite the noise, New York remains the most important city in America. We regularly survey many of our tenants, all of whom confirm their commitment to remain and grow in New York. This includes our clients based in other cities who are making New York their secondary hub. It's no coincidence that the New York area has the tightest residential market in the country. People want to live here. While steel, concrete, and curtain wall are important, capital is the vital raw material in our business. We are currently in the midst of a Federal Reserve tightening cycle, leading to increased interest rates and a scarcity of capital, which is an understatement. Despite Fed funds being at 5%, many typical real estate operators cannot borrow at 10% or may not be able to borrow at all. So, here's what we have done. Seven years ago, when we initiated the Farley Facebook PENN 1 and PENN 2 projects in our key Penn District, we allocated over $2 billion in cash to fully fund our development and construction costs. We didn't realize at that time how foresighted this decision would be. Now, Farley Facebook is completed and paid for, PENN 1 is almost finished, and PENN 2 will complete around year-end. All three assets will be unencumbered, which is quite an achievement. We managed all of our maturities for 2023 and 2024. We put in place a series of swaps and caps which, while beneficial, only offer partial protection. It's important to note that there is no real safeguard against loans maturing in a rising interest rate environment. Additionally, stock market prices reflect current interest rates without accounting for companies that may have lower rate loans, even if those are fixed for a term. Starting in the first quarter of this year, we declared a rightsized dividend, allowing us to retain $128 million in cash annually. Our stock still trades at a relatively high 6.5% yield. In January, we finalized an important deal with Citadel at our 350 Park Avenue building, which involved their master leasing the entire 585,000 square foot building, effectively eliminating 225,000 square feet of vacancy for us. This deal will likely lead to a teardown and the construction of a large 1.7 million square foot tower on a larger consolidated site. Please refer to our press release from December 9, 2022, for details on the transaction. We have many allies on Wall Street, and I believe Citadel is remarkably focused and aggressively growing. This deal highlights the quality of our site, our development team, and our infrastructure. Interestingly, Ken tells me that a key differentiator for his firm is that everyone comes to work every day, five days a week, starting at 7:30. There's a lesson here. I may be unconventional, but I think companies that favor work-from-home arrangements will fall behind. It seems unrealistic to think that years from now, millions of Americans will continue to work alone at their kitchen tables. While Zoom may be a disruptor, its stock price has fallen significantly from $588 to a still high $75 today. In our supplemental materials, we've updated our development projections for Farley, PENN 1, and PENN 2, increasing our expected returns based on the fact that in 2022, we leased 25,000 square feet at PENN 1 at favorable average slotting rates and the positive market response we’ve received for PENN 1 and PENN 2. Our strategy is to achieve strong returns at rents significantly lower than those required for new construction. The ground lease process for PENN 1 is now underway. Following GAAP accounting standards, we initially estimated a ground lease of $26 million in the first quarter of 2022, but based on current market conditions, we now believe that figure should be considerably lower. We foresee 2023 being challenging as both businesses and consumers continue to feel the effects of the Fed's aggressive rate hikes, leading them to tighten expenditures and act cautiously. This is likely to show in lower leasing volumes and stagnant capital markets. We believe that quality products will prevail. Just look at our new constructions and the amenities at PENN 1. Previously, new construction commanded a $20 premium; now it commands a $100 premium or more. Does anyone think that's too high and that the market will eventually adjust? One final point, which is crucial. Historically in New York real estate, all significant upward trends for landlords followed a period of limited supply, and that's exactly where we are now. The current capital markets are making it nearly impossible to construct new buildings, which will signal the onset of the next bull market and a landlord's market. Now, I’ll turn it over to Michael.

Thank you, Steve, and good morning, everyone. As Steve mentioned, we had a strong year despite experiencing headwinds from rising interest rates. For the year, comparable FFO as adjusted was $3.15 per share, up $0.29 or 10.1% from 2021. Fourth quarter comparable FFO as adjusted was $0.72 per share compared to $0.81 for last year's fourth quarter, a decrease of $0.09 or 11.1%. While earnings for the quarter were down, driven primarily by higher net interest expense from increased rates and the noncash straight-line impact of the estimated 2023 PENN 1 ground line expense, our core business had strong performance from the rent commencement on new office and retail leases. We have provided a quarter-over-quarter bridge in our earnings release and our financial supplement. We have several noncomparable items in the quarter, primarily gains from 220 Central Park South sales and other noncore asset dispositions, which in total increased FFO by $0.19 per share. As previously announced, we recorded $595 million of noncash impairment charges during the fourth quarter, of which approximately $483 million related to our equity investment in the Fifth Avenue and Times Square Retail joint venture. It should be noted that the impairment charge is not included in FFO. Company-wide same-store cash NOI for the fourth quarter increased by 7.9% over the prior year's fourth quarter. Our overall same-store office business was up 8% compared to the prior year's fourth quarter, while our New York same-store office business was up 5.4%, primarily due to cash rents at Farley coming online. Our retail same-store cash NOI was up a very strong 7.9%, primarily due to the rent commencement on several important leases. Now turning to 2023. While the current economic environment makes forecasting more difficult than usual, we expect our 2023 comparable FFO to be down from 2022 given the known impact of certain items. These include roughly $0.40 from additional interest expense as a result of a full year of higher rates on variable rate debt, net of higher interest income and capitalized interest, assuming the current SOFR curve. $0.10 from the prior period property tax accrual at the MART was recognized during the second half of 2022; and $0.05 of lower FFO from the sale of assets in 2022. These reductions could potentially be offset by a lower result on the PENN 1 ground rent reset that is currently running through our earnings, which Steve mentioned earlier. Now turning to the leasing markets. We see 2023 as a year of both challenges and opportunities. The pace of leasing has slowed in the past few months, and the activity is lumpier as businesses generally are feeling cost pressures and are exercising more caution. Companies are still grappling with hybrid work policies and the right level of flexibility, but overall sentiment is shifting more closely to pre-pandemic norms. We are seeing a real pickup in the return to office throughout our portfolio, particularly Tuesday through Thursday. Utilization rates are approaching 60% and momentum is improving month by month. Both employers and employees clearly recognize the productivity, collaboration, creativity and cultural benefits of working in the office together. Flight to quality continues to be the prevalent theme for tenants. However, leasing activity is broadening out. We are seeing a pickup in activity in the traditional multi-tenant Class A buildings as tenants are dealing with the aforementioned cost pressures and are not all willing to pay new construction rents. One thing we do think will begin to emerge this year is a heightened focus on the quality of the landlord. Many landlords, particularly private ones, are beginning to struggle with high leverage levels, which may limit their ability to invest capital in their buildings, or in some cases, even retain their assets. Tenants and their brokers are smart enough to figure out which buildings these issues are at and avoid them. Strong, well-capitalized landlords like Vornado will benefit. A perfect example of flight to quality with strong sponsorship is the previously announced 350 Park Avenue transaction with Citadel. We began our relationship with Citadel at 350 Park in the beginning of 2020 with an initial 120,000 square foot lease and are proud of the relationship we have built with our team, which is culminated in this master lease and a future potential partnership for a new 1.7 million square foot world-class building at the site. Our overall leasing pipeline in New York remains healthy at almost 1.2 million square feet of leases with 275,000 square feet of leases being finalized and another 900,000 square feet of activity in various stages of negotiation. The financial sector, in particular, continues to be active. Turning to retail. With the rebound in tourism of daily workers, we are continuing to see more retailers search Manhattan for new store locations. Retailer sales are generally back at pre-pandemic levels, which is spurring retailers to become more confident and active in taking new spaces. They are still concerned about inflation in the overall economy but are starting to lock in deals given rents are at much more attractive levels. Turning to the capital markets now. The financing markets remain highly constrained, driven by the volatility from the Fed's sharp rate increases. Banks are dealing with an increase in problem loans and remain cautious in lending and the CMBS market is still largely closed. While financing is available for the highest quality sponsors and properties, the markets will take some time to thaw, which likely won't happen until the Fed ends its tightening cycle. On the asset sale front, there continues to be active interest from investors in New York office and retail assets, but without a stable financing market, it remains difficult to transact large assets without in-place debt right now. In these volatile times, we remain focused on maintaining balance sheet strength. Our current liquidity is a strong $3.4 billion, including $1.5 billion of cash, restricted cash and investments in U.S. T-bills and $1.9 billion undrawn under our $2.5 billion revolving credit facilities. In addition, as a result of our refinancing activities early last year, we have no significant maturities through mid-2024. With that, I'll turn it over to the operator for Q&A.

Our first question comes from Steve Sakwa with Evercore ISI.

I guess I wanted to start with the developments and the yields, Steve, that you talked about. I guess I can understand maybe the PENN 1 return going up a bit since you've got kind of active leasing and maybe good mark-to-market and a little more visibility there. But I guess I was a little curious about PENN 2. You did take the yield up there, but I don't think you've done any incremental leasing, but maybe that's part of the pipeline that Michael talked about. So could you maybe just sort of address those two?

We increased the yield on PENN 1 and PENN 2, while making a slight decrease on Farley. This decision was made based on our experience over the past one to two years with these assets and understanding the market's response. We have signed 220,000 square feet of leases in PENN 1, which gives us clarity on the bidding for both PENN 1 and PENN 2. The bids exceed our initial projections, prompting us to adjust the returns accordingly.

Okay. As a follow-up, Michael, when you mentioned the challenges to growth in '23, I understand the impact of interest expenses and the $0.05 in sales. It seems like the ground lease might perform a bit better. However, I didn't fully grasp the $0.10 related to property taxes. Could you clarify that? I thought it might have provided some support in the first half of the year, so I want to ensure I have a clear understanding of that point.

Yes. We had a prior period accrual. It obviously benefited us at the end of '22. We didn't have it in the first half of '22, and so that gets reversed at the beginning of this year, and that's a ding. So it's a timing difference. We benefited last year, we got hurt at the beginning of this year. Net-net, there was a reduction, but it affects us in the beginning half of 2023.

The next question is from John Kim with BMO Capital Markets.

I wanted to ask about the write-down you took, particularly at 650 Madison. That's an asset where it was pretty well occupied. There's no loan upcoming. I was wondering why you decided to impair it now and what are your plans with the asset?

The accounting for joint venture assets differs from that of wholly owned assets. Consequently, looking at what has transpired since we acquired the asset, this has led to an impairment this quarter. Retail rents are not where they were when we purchased the asset or what we initially projected. We unexpectedly lost a major tenant in the hospital last year. Running it through the accounting model led to this outcome. It's important to remember that this is a noncash item. We still possess the asset, and its value may bounce back. We have favorable term debt on it and will keep working with the asset to hopefully generate value. However, as we assess the situation today based on the accounting approach, this is the result.

John, you used the words in your question, why we decided to take an impairment. The impairment process is rigorous and is, to a large degree, formulaic and is, to a large degree, overseen by our independent accountants. So we try to keep as much subjective judgment as possible out of it and make it more of an academic, formulaic kind of an exercise. And they may have shown that the write-down was appropriate there.

Okay. My second question is on the MART with the occupancy following this quarter, really driven by the showroom and trade show. What's going on with such a big drop in occupancy this quarter? And if you could also comment on variable businesses, which in the past few quarters have been a driver of earnings growth. And it's not really disclosed so much this quarter. I wanted to know what's been going on with signage and trade show.

It's Glen Weiss. So on the MART, the increase in vacancy was due to the casual business leaving Chicago for Atlanta. We are converting that churn business into office space, and that's the increase in the vacancy at the MART. There are headwinds in Chicago, not like New York in terms of leasing volume, pipeline, et cetera. Our 2.0 program is coming along great, that we expect to be complete in June. Our tour volume has been very good of late. We have a couple of leases in negotiation right now. But the increase in the vacancy is the casual business, which moved out of town to Atlanta in the fall.

Yes. John, on the variable businesses, I think the punch line, if you will, is that all the variable businesses except for the trade shows are back to pre-COVID levels. We had a very strong 2022. I think signage had our most successful year ever, and that was with a little bit off-line fourth quarter, so a little bit more of that. We've got a couple of signs located at PENN 2 and Hotel Penn that are impacted by the development, and so fourth quarter was a little bit off compared to fourth quarter 2021. But really, everything, whether it's signage, garages, BMS had a strong year, generally up, as I said, except for signage quarter-over-quarter or year-over-year, I should say. And then the trade shows, a little bit of timing difference from the prior year fourth quarter when we were cranking it back up. Some of the shows got moved to the fourth quarter, and this year back on their normal pace. So trade shows are not back to peak yet. We think they'll get there in the next couple of years, but the rest of the businesses are performing quite well. In particular, the signage where we've got the dominant signs in Times Square, we're actually redoing the sign on 1540 right now, which will book in both sides and hopefully allow us to drive additional revenue given the fact we control two mega signs at the heart of the area. We think that's a positive. And then obviously, what we're doing in PENN, over time, we think will continue to perform well once the construction is completed. But that's in a nutshell where we're at with our businesses.

So net is variable going up or down this year?

In 2023, it's difficult to make predictions. I would say that since we have taken a few signs offline in PENN, much of this depends on the third-party roadblocks we encounter. Overall, we believe it will likely be similar to 2022, but it might be slightly lower due to the offline signage and the ongoing rebuilding of 1540, which means we are temporarily losing some revenue. So, in general, we expect a slight decrease since we have taken some elements offline.

The next question is from Camille Bonnel with Bank of America.

I know the opportunity with Citadel is still a bit down the road, but are you able to speak to the financing strategy there in context with your existing development pipeline around Penn District? Just generally, like how are you thinking about the capital allocation and sourcing for these future projects?

Camille, the good news is we don’t have to do it today because it would be very difficult to secure construction financing and quite costly. Regarding the 350 project, it’s not the right time for that. It will be suitable in two or three years, but not at the moment. Hopefully, the markets will be more favorable than we expect. I believe the same applies to PENN. As Steve mentioned in the last call, the current market is not conducive for new development. Construction financing is expensive and often not available as banks have tightened their lending. It’s a challenging situation, and today is not the time to align that up. However, in the future, the markets should stabilize. For the 350 project, we plan to secure a traditional construction loan at 50% to 60%, with our partners covering the remaining equity, primarily sourced from our land contribution.

We are very enthusiastic about 350 Park Avenue, and even more so, the tenants share this excitement. Our strategy is straightforward: our land value will serve as our equity contribution, meaning we won’t need to inject an additional $10 million to $30 million in cash for our equity stake. The remaining funding should be manageable in a typical market. The deal includes a significantly sized anchor lease, and everything is well-orchestrated. Our land effectively becomes our equity, and with an anchor tenant secured, our plans are solid. Additionally, our development and construction teams currently engaged at PENN will quickly transition to 350 Park after completing PENN 1 and PENN 2. We are already progressing with the building design and have begun the approval process, aiming to be ready for construction in about two years. Notably, our cash requirements in a standard financing environment will be virtually negligible, and it's shaping up to be a fantastic project.

Yes. Really appreciate all the details on 350 Park. Just for my follow-up, you've done a great job in terming out your maturities, but your leverage on a net debt basis is above 10x. So can you talk to how you're thinking about leverage today and where are your near- to medium-term targets?

Michael.

Our leverage is probably a bit lower than we previously indicated. Our aim over time is to reduce leverage. Importantly, we do not have any maturities this year. In fact, a couple of small maturing processes are now being extended. However, our preference remains to have less leverage. We believe this can be achieved through growing earnings and potentially some asset sales. Will this change in the next 24 months? Given the current environment, probably not. But we expect this to happen over time.

The next question is from Michael Griffin with Citi.

Hang on, I want to go back for a second. I want to emphasize what Michael said. In terms of the leverage ratio that you referenced, we sort of have our hands tied behind our back. So number one, we've had a decrease in earnings, which is going to recover, variable businesses and what have you. Number two is we have zero income coming in basically from PENN 2, which will be over $100 million of income when it gets online. And we have less than underwritten optimal earnings from PENN 1. So if you pro forma forward, when we get all these different parts of our business stabilized, our leverage ratio will come down very significantly. I'm sorry, go ahead.

Michael Griffin here with Citi. Just maybe getting back to leasing. Michael, you mentioned in your prepared remarks, your leasing has slowed, transactions are lumpier. You pointed to about 1.2 million square feet in the pipeline. Just looking over the cadence of this year with some bigger upcoming maturities. I mean, how confident are you in executing on that? And is there any update on maybe some of those more larger notable upcoming expirations? I think there's one at 770 Broadway coming up here maybe at the end of this quarter. So any update there would be great.

Michael, it's Glen Weiss. So we really had four bulky expirations that constitute our expirations in '23. One was 350 Park, which is now taken care of by Citadel, the other three is continuous expirations coming off low rents from PENN 1 and then two blocks, one of which comes back this quarter, from Verizon at 770. And then at the end of the year, we get the other back at 1290. As you can imagine, we're all over it. We're attacking the market, presenting the buildings, marketing the product towards weekly. We think both assets are very high-quality assets. 770 is probably the most unique block of space in Midtown South. Excellent building, great bones, in the market now with those three floors in 1290. By the end of the year, we'll be ready for action already showing the product, showcasing some amenity programs we're going to undertake in '24. So that's the real outline of what's coming this year in terms of expiries.

I guess to that point, you have this pitch around the building around the high-quality transportation hubs. An asset like 770 Broadway maybe doesn't really fit into that strategy. So I guess how do you measure demand relative to that versus opportunities you might have within the Penn District?

770 is a great spot. It's right at the subways that will let you to Grand Central and Penn very easily. It's right at NYU, right in the village. It's in the sweet spot of Midtown South. So geographically, we think it's excellent.

Okay. And then maybe one for Steve. I'm just curious, you've focused on in your prepared remarks about the importance of getting employees back to the office. In your conversations that you're having with business leaders and how much more do you think they can really push their employees to get back in. And I think you talked about that 60% kind of occupancy number maybe on Tuesdays and Thursdays. Do you see that potentially getting back to that pre-COVID, call it, the 70% to 80% range?

I think normal is more like 70% because there's always people who are traveling, not in the offices and what have you. So to try to get to 90% is fictitious. So I mean, I think we're getting close to 50% now on Tuesdays, Wednesdays and Thursdays. I think you can assume Friday is dead forever. Friday is going to be a holiday forever. Monday is touch and go. So I think that the world is coming back to normal slowly but surely. So multiple things are happening. Number one, every boss wants his people back. Number two, many of the people want to come back. They find this being alone; they want to come back with their colleagues, they want to get back into the activity, excitement and what have you, collaboration and being in the city. So slowly over time, I think that will all revert to normal. Your question was what power do the voices have? Well, some of the bosses have total power and some of the bosses have no power. And I can't comment on that either way. But the most important trend is people are wanting to come back themselves. Employees actually do want to come back.

The next question is from Alexander Goldfarb with Piper Sandler.

First, congratulations on 350 Park. Awesome, awesome deal. So well done to you and Michael and everyone. So that's awesome. Two questions. First, on the Retail JV, the impairment that you guys took, what prompted that? And big picture, as we think about the rents that are in place versus the market, and it seems like the market has settled and hopefully is recovering. Where would you peg the mark-to-market? And then do you think that there will be future impairments? Like is this an annual exercise? Just trying to get some more color on this.

I can't predict the future nor do I want to. We went through a thorough evaluation, and the calculations indicated there was an impairment, so we follow what the data reveals. The current market rents are in a very limited market with very few transactions occurring on Fifth Avenue and Times Square. You can assume that this remains a sluggish market that hasn't fully recovered. The demand for space isn't as strong as it was five years ago, but I am confident it will return.

Okay. The second question is about your recent mention in the press that you're still looking for a casino. It's been a while since you discussed movie studios. The Manhattan Mall seems like a great location for potential studios. Can you provide an update on this? Do you have an operating partner for the studios? Do you have one for the casino? Or are both of these items more of a back burner issue than a priority right now?

The answer is yes and yes in terms of operating partners, and no, they're not really back burner.

The next question is from Vikram Malhotra with Mizuho.

So just first one going back to sort of your view of the dividend or the Board's view. If you can just give us some more color, what are you baking in, in terms of occupancy for the core portfolio, just the business as it stands in terms of street retail. I asked that because it sounded like the four key expirations you outlined, am I correct in that they're all move-outs? I just wanted to understand like what is baked into the core portfolio relative to where the dividend is? Just some big picture metrics or guidepost would be helpful.

The dividend is determined by a minimum level of taxable income. Our taxable income allowed us to adjust our dividend to a more appropriate level. The dividend was at 9.5% of our stock price, which many agree is inaccurately valued. We believed it was not right to pay a dividend that significantly exceeded our taxable income. The Board also decided that retaining an additional $130 million in cash was the right approach. That explains the changes to the dividend.

Okay. And then if I just follow up, if I can dig into street retail. Two parts to it. First, I think you have a couple of key expirations in Times Square in '23. And I'm wondering the latest on renewal there? And then second part of that is just I think there are two big leases if I'm not wrong, Swatch and Levi's that have early termination rights in '23 and '24. They don't expire until '31, but I believe they had the option to terminate. Any updates or color you can give on those two as well would be great.

We are currently in active negotiations with those clients and all the other tenants. We are hopeful to retain all of the tenants, but the rents will be lower than the current rents. The market is not as strong as it was in previous years when those agreements were made. Therefore, you can expect that we will keep the tenants, but at reduced rents.

So Vikram, just to be able to put a finer point on it. So Swatch had to exercise their notice in fall of '21, and they did. And we have, as Steve alluded to, we finalized an agreement for them to stay at a lower rent. So at the time they exercised the termination, we didn't know what they were going to do, but that agreement has recently been finalized. So they will stay, and as Steve said, at a lower rent. And with respect to Levi's, they as well have a termination option. I believe it comes up in '24, not this year. And so we'll see what they do. But again, as Steve alluded, the likelihood is that just as Swatch did, they may exercise that. Our hope and expectation is we'll keep them, albeit at a lower rent. The other leases that expire in 2023, some of those have been sort of, I'll call it, shorter-term leases which we've continued to keep those tenants in place. I think we'll continue to do that. And beyond that, I think there's probably only one substantive expiration in 2023 at Times Square. And that happens middle of the year, and that's an active discussion right now.

The next question is from Dylan Burzinski with Green Street.

Just curious on the overall strategy of the company. I think in the past, you guys have mentioned possibly doing a tracking stock. So just curious, is that still on the table? And if so, could we see that happen in 2023?

Yes, it's still very much on the table. We are not ready to talk about the timing, which will not be set until we actually make the decision and announce it.

Okay. And then just going back to the ground lease reset. I think you had mentioned that the $26 million might be less today. But I'm just curious, can you kind of give us an update on how that process works? I think our initial thought was when we saw that the yields increased at the Penn District redevelopments that we thought that the ground rent might reset higher. So just curious to see kind of an update on sort of the arbitration process and how that works.

Each ground lease is somewhat unique. This particular one involves brokers negotiating, and if they cannot reach an agreement, a neutral third party is appointed. The outcome depends on experienced brokers determining the value of the land when it is vacant and unimproved. This means figuring out the current selling price of that land, which differs from an appraisal process involving a willing buyer and a willing seller. We consider this to be a brokerage process. Currently, we believe the value of the land is lower than it was one and a half years ago when we estimated it at $26 million, possibly significantly lower. This is a key factor in the analysis. Most assessments are based on the expected return from a new building and the remaining land value. Therefore, even if we can achieve a slightly higher rate per square foot on a $90 or $100 lease in PENN 1, it does not influence the land's value.

The next question is from Anthony Paolone with JPMorgan.

Michael, you went through a whole number of the parts of the business in terms of the impact on FFO in '23 versus '22. But can you maybe help bottom line just the core office and retail NOI and whether that's higher or lower this year?

Tony, you're trying to box me on the guidance here. Like we're in a fluid environment, right? It's hard to predict. Overall, we think the performance will be comparable to this year, I would say. And that's not trying to give you a guidance. It's just we have some ins, some outs. We can't print exactly what will come along. It depends on which tenants we renew, which may roll out. But in general, like we have some known positives, we have some known move-outs as we've just talked about. Overall, as we sit here today, it's probably neutral.

Okay. And then the second question is on 350 Park. I mean, you crystallized value there at a level that seems to be pretty well north of what I think most people probably had in their numbers and where you're getting credit for it in the stock, most likely. So just wondering how you thought about the ability to just completely exit. I think next year versus staying in what could be another, I guess, 7-plus years or so, like how you think about that being worth it versus just saying you did well with the deal you cut, use that capital otherwise?

Well, first of all, I would quibble with well north of value. The pricing in that deal, we think was fair to both parties. In terms of what our financial strategy will be a year or two from now when we have to make the decision as to whether to invest in the long-term building project and own 40% of a 1.7 million square foot brand new, super-duper Times Square Tower or to take the money and run, that's a decision we'll make at the time. But it is an interesting fact that we have the option to do either.

The next question is from Nick Yulico with Scotiabank.

I just wanted to touch on the St. Regis retail, where you had the default in the JV. Can you just tell us why the lender did not refinance the loan? And can you explain the earnings impact from this, I guess, right now, how it's working since it looks like there's some sort of cash flow sweep. And then if for some reason, you can't get this resolved, does the joint venture just walk away from the property? How does that ultimately get resolved? And what could the earnings impact be?

The loan is maturing at the end of the year, and the asset cannot be refinanced at this time due to the current market conditions. We had signed two leases at the market's peak, and after one of those leases terminated, we relet the property at a lower rent, which made the asset nonrefinanceable. As a result, the loan has defaulted. We had discussions with the lenders prior to this situation and continue to engage with them to restructure the loan and extend the maturity. If we're unable to reach an agreement, the asset will revert to the lenders. We intend to approach this situation with discipline and careful consideration about whether to remain invested in the asset. The advantage of having nonrecourse debt is that if we can't find a solution, we can choose to walk away. However, I believe we will be able to come to a deal, as it is in the lenders' best interest as well. In terms of the interest rate, while there have been reports indicating an 8.5% default rate, that rate will not be paid. We will either return the keys or restructure the deal, resetting the interest rate to what it should be. Therefore, that interest is not going to be paid. Regarding the impact on earnings, if the situation were to end today, I don’t foresee a significant flow-through of funds from operations, especially since it is a floating-rate loan and the cash flow relative to income is minimal.

Okay. Understood. Appreciate that. And then going back to 650 Madison, I know you talked about this a little bit. I mean, it looks like that asset got refinanced in 2019, and I think there was a $1.2 billion appraisal on it. There's $800 million of debt on the asset right now. And so if you're saying the equity is zero, basically, I guess, the building is worth $800 million. So that would be about a 35% asset value decline since 2019 when it was refinanced. So please correct me if I'm wrong on those numbers. But I guess what I'm wondering is, from that standpoint, you did talk about occupancy being down, and I know rates are higher as well. But how would you kind of frame out that level of an asset value decline for office and retail now versus 2019? Is that indicative of a lot of the portfolio or only the pieces where you do have some more structural vacancy right now?

Yes. First, you mentioned a couple of points. We refinanced in 2019, which was a strong execution by our team, extending the loan until 2029 at around 3.5%. This gives us some breathing room. Regarding the impairment, the critical aspect to note is that the noncash charge allows us to hold onto the asset while we continue our work on it. The appraisal conducted was a lender appraisal, and I cannot speak to how the asset might have been valued back in 2019 given the specific circumstances of that time. There have been some changes since then, particularly with a significant tenant vacating, and overall rents have declined, especially in office and retail sectors to varying degrees. All of this is reflected in the current analysis. As noted by my colleague, the impairment assessment, especially for joint ventures, follows an accounting-driven process, which is what was produced today. However, there is nothing preventing the value from increasing over time. As we conclude 2022, that is the current situation.

The next question is from Ronald Kamdem with Morgan Stanley.

This is Timmy filling in for Ronald Kamdem. You mentioned some of the challenges for next year in your prepared remarks. Considering PENN 1 and the potential upside in 2023 compared to 2022, rents are currently $76 a foot. What do you anticipate that will be by the end of 2023?

So we're coming off rents in the high 60s, low 70s. We have leases out right now that are piercing $100 in the tower of this building. So that gives you a feel of where we believe rents will go as we sign up leases for our in-place vacancy and for the expirations going forward.

The next question is a follow-up from Steve Sakwa with Evercore ISI.

Just one follow-up, Michael. On some of the swaps and caps that are maybe burning off or coming to maturity here in '23 and '24. Should we assume that you're just going to let those kind of float? Are you going to put new caps and swaps in? Or just how should we be thinking about that as the Fed kind of nears the end of the tightening cycle?

Yes, we deal with these issues daily, Steve. Some of them likely pertain to 2023, but 2024 is when we have a loan maturity that requires us to decide on the refinance options, which is more of a 2024 concern. For loans maturing in 2024, if we switch to a fixed-rate loan, we won't need to make swaps. In terms of the loans set to expire, we expect most will have caps and we plan to roll those over in the coming months. We typically handle these on an annual basis, although extending them for a couple of years is possible. Regarding the swaps, we are actively seeking opportunities to manage those as well. The Fed seems to be approaching the end of their tightening phase, and interest rates are beginning to decline. I believe we made a wise decision by waiting and locking some of those in more recently. However, we have a few expirations this year with maturities next year, and we need to determine the right financing method for the asset before making any final decisions.

And the next question is a follow-up from Vikram Malhotra with Mizuho.

Michael, regarding the $0.55 you mentioned in relation to the challenges, does that include the known office move-outs and the lower street retail rent you referred to?

I mean, Vikram, the only data points I gave you were on interest, the margin on asset sales. The rest is we'll see how the business performs. And as I said, I think there's some pros, cons. By and large, we think probably neutral, but we can't predict. It depends on what happens in terms of pace of leasing.

Okay. As a follow-up, given the current view of taxable income for 2023, have you adjusted the dividend, and if some of the unknown factors don't go as planned, would you need to reconsider the dividend? Or have you accounted for those uncertainties you just mentioned?

The dividend is a Board decision. And we're certainly not going to speculate on what might happen to the dividend and certainly not from a negative point of view. So that's a question that we can't answer and won't answer now.

There are no further questions at this time. I would like to turn the conference back over to Steven Roth for any closing remarks.

Thank you, everyone. We find ourselves in a unique situation during a period of Federal Reserve tightening. As Owen Thomas mentioned in his recent call, commercial real estate is facing a recession. I don't disagree with that observation. However, the market conditions are soft, which we view as an exciting opportunity. We believe we will navigate through this situation successfully and look forward to the chances that arise. We anticipate things will improve on the other side. Happy Valentine's Day, and we look forward to connecting again next quarter.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.